INSIGHT: Clearer signs of a global recovery but output stays down

17 November 2009 17:20  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The global recovery is under way, led by China, and chemicals producers are benefitting. But output levels are still way below those at the start of last year. The downturn has been long and deep and no one can be certain of its after effects.

Yet, as Cefic pointed out on Tuesday, the production data are beginning to demonstrate recovery, not simply surveys of business confidence.

The improved outlook in Europe has prompted the trade group to be a tad more upbeat in its latest outlook for the sector, but only for 2010 and in tone rather than absolute numbers.

Cefic still feels that chemicals output in Europe can grow by around 5% next year (it said the same in June), although it appears more optimistic. It says most chemicals sub-sectors in most major EU countries are seeing some recovery but cautions that there is no sign of any major rebuilding of inventories by downstream customers. This, it says, suggests a “prevailing mood of caution and continuing difficult credit and liquidity conditions”.

The forecast is for further recovery but at what is called a “cautious” pace. It is encouraging that the trade group does not see any “double dip” setback, although it reckons 2010 will be a “year of transition”. In the circumstances, that is probably not too bad, but underlying the forecast and the prognosis on the patient is the still-low level of output, which remains miserable compared with the industry peak in the first quarter of 2008.

The numbers will look better in 2010 as comparisons are made with a particularly difficult early part of 2009. The industry in Europe is still operating far below optimum rates of capacity utilisation and that means lower production efficiency and reduced margins. It is likely to be some time before peak levels of output are reached again. How well industry players are able to respond to a stronger upturn in volume demand remains to be seen.

But it is the opportunities that companies are taking, to lift volumes on the one hand and to cut, largely organisational, costs on the other that will mark them out during the upturn.

The American Chemistry Council’s (ACC's) economic report late last weak noted that the global recovery alongside the weaker US dollar and lower natural gas costs had boosted exports. Thermoplastic resin exports from the US are up almost 16% in the year to date while domestic resins sales are 14% lower.

The North American markets are recovering if stronger railcar loadings are a guide. But, the ACC notes, the exports share of production has doubled over the past five years. These sales have provided much needed support for domestic producers.

Reduced US consumer spending will not help chemicals makers and rising levels of unemployment are of great concern. However, the modest economic recovery in the US is being matched elsewhere, and the US trade balance widened in September, signalling a stronger appetite for US goods.

It is the breadth rather than the strength of the recovery that is encouraging and, with still-strong growth in China, provides somewhat greater confidence in the future.

“Overseas, it is becoming more apparent that a broad-based recovery has emerged,” the ACC said. Industrial production (IP) in the EU has rebounded and accelerated to a 16.1% gain in October. In some of the East Asian economies IP growth has turned positive year on year.

Industry executives have understandably been cautious in such circumstances and even the most upbeat have not talked freely about or admitted that they are banking on a recovery in 2010. The credit crisis and the downturn, however, have changed the face of many markets. Producers and consuming companies are working with much lower stock levels.

There are concerns that there could be a stop-and-go recovery in chemicals as pressured companies seek to re-stock but find it difficult to do so.

Consultants DeLoitte pointed out this week that in some instances the location of demand has shifted and companies are having to deal with different customers. Emerging from the recession, companies will find themselves on a steep learning curve.

That learning process will prove positive for some but not for all. Markets are improving but the pressures on cash flows largely remain.

The data collected by Cefic and the ACC are turning more positive and painting a prettier picture, but there is a great deal of caution in the wind.

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By: Nigel Davis
+44 20 8652 3214

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